DEFINITION of 'Financing Entity'

The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed entity. A financing entity receives a fee for providing financing, and is linked to the financed entity through a chain of financing transactions across all intermediaries.

BREAKING DOWN 'Financing Entity'

Financing entities and financed entities represent the two major parties in a financing arrangement. A financing entity provides money that is used by the financed entity. Other entities may serve as intermediaries. The financing entity can borrow the money from a bank or other financial institution using assets as collateral. For example, a business may “sell” its inventory to a financing entity, which uses this new collateral to secure a loan from a bank. The financing entity then remits the bank funds to the business, and the business repurchases the inventory and provides the financing entity with a fee. While the legal title of the business’ inventory was transferred to the financing entity, for intents and purposes the inventory is still owned by the business.

In insurance, financing entities include underwriters, lenders, and purchasers that have a direct ownership in a life insurance contract. A financing entity's primary role in a life insurance transaction is to provide funds. A financing entity is involved in the business of viatical settlement, which includes activities related to the offering, purchasing, investing, financing, selling, and underwriting of life insurance policies.

Regulators seek to ensure that financial entities are in good financial condition, and consider actions that misrepresent or conceal the financial health of a financial entity as fraudulent. The Internal Revenue Service (IRS) reviews such arrangements in order to determine if the purpose of the intermediaries was to disguise the transactions as being a financing arrangement. If the IRS determines that the purpose of the financing arrangement is to lower withholding tax, it may decide on whether the intermediate entities are acting as conduits.

RELATED TERMS
  1. Accounting Entity

    A clearly defined economics unit that is accounted for separately. ...
  2. Bond Bank

    A state-level entity that provides that state's smaller public ...
  3. Underlying Debt

    In municipal bonds, underlying debt relates to an implicit understanding ...
  4. Actual Owner

    A person or entity that receives the benefit of ownership. Being ...
  5. Interlocking Shareholdings

    A method of creating a unified business group by exchanging shares. ...
  6. Reference Entity

    The party upon which the two counterparties in a credit derivative ...
Related Articles
  1. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
  2. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  3. Investing

    What Does Finance Cover?

    Finance is the study of banking, leverage, credit, capital markets, money and investments, along with how they are used by individuals and companies.
  4. Small Business

    What Does Corporate Finance Do?

    Corporate finance is the subset of finance that involves how corporations use leverage to fund their operations and capital purchases.
  5. Small Business

    How Special Purpose Entities Help Fight Risk

    A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.
  6. Investing

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  7. Investing

    Understanding Structured Finance

    Structured finance refers to a complex financial transaction involving large financial institutions and companies with unique needs.
  8. Small Business

    Small Business Financing: Debt Or Equity?

    There are two sources of financing for small businesses: debt and equity financing. This article explains both.
  9. Taxes

    What is a Direct Tax?

    Governments and taxing entities impose direct taxes directly on individuals and businesses.
  10. Small Business

    The Basics Of Financing A Business

    From debt financing to equity financing, there are numerous ways to fund a business startup. But which is the best?
RELATED FAQS
  1. What are some examples of how corporations manage short-term investments?

    Learn how a business owner can protect against significant liability by forming a corporate entity structure, and understand ... Read Answer >>
  2. What steps are necessary for a business to secure equity financing?

    Understand the steps necessary for a small business to secure equity financing for working capital, financing expansion or ... Read Answer >>
  3. How can a company or entity challenge the absolute advantage of another company?

    Understand what absolute advantage is, and learn how a company or entity can challenge the absolute advantage of another ... Read Answer >>
  4. What are the different equity financing options available to companies in the United ...

    Learn what equity financing options are available to small, mid-sized and large companies within the United States and understand ... Read Answer >>
Hot Definitions
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  3. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  5. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  6. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
Trading Center